1. Pollute or Don't Pollute

Consider an example of the Gowanus Canal, a canal in New York City borough of Brooklyn. It's one of the most polluted bodies of water in US. Pollution has become so bad in the canal that the Environmental Protection Agency placed it on its National Priority List. How could things get this bad in a major city? Economists think that game theory can shed insights into the question. They give an example of profits for two firms on the canal (which list below in the table). Try to use what you learn in the lecture of Game Theory and the example below to explain why everyone is worse off as a result and why government intervention/regulation might be necessary.

Firm 2 Pollute Don't Pollute Pollute Firm 1: earns Firm 1: earns $50,000 $90,000 Firm 2: earns Firm 2: earns $50,000 $5,000 Firm 1 Don't Pollute Firm 1: earns Firm 1: earns $5,000 $70,000 Firm 2: earns Firm 2: earns $90,000 $70,000